TIMOTHY NOAH SEPTEMBER 23, 2011
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My New Republic colleague Jonathan Cohn's otherwise excellent Sept. 21 post, about congressional Republican leaders' thuggish letter to Ben Bernanke telling the Fed chief not to engage in further economic stimulus, is marred, in its postscript, by an excess of fair-mindedness. Citing the Washington Post's Ezra Klein, Cohn concedes that yes, there was a time when Democrats were equally guilty of trying to interfere with the independent Federal Reserve Board. And so they were. House Speaker Jim Wright actually called for Fed Chairman Paul Volcker's resignation back in 1982 when Volcker was in the process of vanquishing a decade's worth of out-of-control inflation with high interest rates (though my mentor Charles Peters, himself a spirited Fed-basher at the time, points out that an oil glut that materialized in 1981, and a steep collapse in oil prices in 1986, had a thing or two to do with conquering the Great Inflation). Let he who is without sin etc.
What Cohn (and Klein) neglected to point out in making their comparison was the differing purposes of Democratic Fed-bashing and Republican Fed-bashing. The Democrats attacked Volcker because his tight-money policies brought on a recession and drove the unemployment rate to a postwar high of 10.8 percent. Even the Great Recession of 2007-2009 (which may be segueing into a second recession of 2011-2012) never matched that. Today the consensus among economists is that Volcker was proven correct that inflicting severe pain on the economy in the short term would yield long-term benefit. But the pain was very real, and those who criticized the Fed in 1981 and 1982 were motivated by a desire to end it. If Peters is right, then that suffering wasn't actually necessary. And even if he's wrong, relatively little of the subsequent economic recovery's benefits trickled down to ordinary people. During President Ronald Reagan's two terms in office median household income increased by a mere 9.8 percent, compared to 14.5 percent during President Bill Clinton's two terms a decade later.
To summarize: Democrats bashed the Fed because its policies put people out of work and halted economic growth. They may have been wrong to do so, but they weren't wrong to worry about the 1981-1982 recession's harmful effects.
Why are Republicans bashing the Fed? Because they think its policies are inflationary. With interest rates at historic lows, that's just laughable. Because they think it will create (I'm quoting the GOP letter now) "more fluctuations and uncertainty." That's true. When you attempt to revive the economy you create some uncertainty about whether it will dive straight into the crapper. Because it will "promote more borrowing by overleveraged consumers." But borrowing is precisely what's needed in the short term; if the GOP were at all sincere in its worry about long-term consumer debt it wouldn't be burning Elizabeth Warren in effigy and trying to kill off every last provision in the Dodd-Frank financial reform bill. In short, the Republicans are bashing the Fed because they don't give a damn about unemployment and sluggish growth. A charitable explanation would be that they think short-term suffering is necessary to restore solvency (though if they think the nation's public and private debt can be eliminated as quickly as inflation was in the early 1980s they are seriously deluded). That is very different from wanting to end suffering and hasten economic growth, which is what the Fed-bashing Democrats, rightly or wrongly, wanted back in 1982. A not-charitable (and more plausible) explanation is that the Fed-bashing Republicans want the economy to worsen to improve their side's chances of winning back the presidency in 2012. For that, there is no Democratic precedent.
8 comments
A more sympathetic reason might be that the Republican's Supply-Side and Free-Market dogmatism leads them to conclude that ANY Keynesian approach toward stimulating the economy by anyone is simply wrong. They are incorrect, their dogmatism is incorrect, and their Supply-Side theory is incorrect, so kow-towing to the Republican demands would worsen the economy. But that's their motivation. They're not evil, they're not self-serving, they're simply devoted to a wishful-thinking economic theory that doesn't work. THAT is the argument that needs to be made. And not to the Republicans, their Luddite approach toward facts, reason, the Economy, and Keynes has demonstrated no amount of argument is going to change their minds. No, the argument needs to be made to the American People that more "Voodoo Economics" is NOT going to solve the problem. Because it's the votes of the American People against these policies of the Republican Party (and the Tea-Party) that will ultimately allow a REAL solution to be implemented.
- AllanL5
September 23, 2011 at 11:31am
It's also been pointed out that the difference between good and evil is NOT the methods they choose (which can be similar, like Fed Bashing) but the goals they are trying to achieve (Democrats -- improve the Economy through Keynesian stimulus. Republicans -- improve the economy through Supply-Side wishful thinking). So if you concentrate on the means, everyone looks the same. But if you concentrate on the goals, you can see the dramatic differences.
- AllanL5
September 23, 2011 at 11:34am
Two comments. First, an enormous amount of the nation's, and world's, cash is now invested in bonds, mostly government (US) bonds. And what do bondholders fear more than anything? Inflation, any inflation, because it erodes the value of their investment. Indeed, yesterday's drop in rates added billions to the net worth of those bondholders. It's not so much that Republicans don't care about the unemployed, it's just that they care about those bondholders more. Second, I'm encouraged that TN didn't endorse a Democratic political strategy of promoting inflation. While I support some inflation as a matter of policy, that's really dumb politics. I mean, do Democrats really want to be known as the party of inflation? [The average voter doesn't understand the (inverse) correlation between inflation and unemployment; indeed, about as many on the right will acknowledge the Phillips Curve as will acknowledge evolution.]
- rayward
September 23, 2011 at 11:41am
One can be devoted to supply-side economics, and simultaneously, can wish for, and try to help along, a worsening economy, that will increase his or her party's prospects in the next election.
- liberalref
September 23, 2011 at 11:44am
More mirth at TNR. Ray says that Republicans care more about bondholders than about the unemployed. This would be the party who played footsie with defaulting on the debt. It was the likes of Jamie Dimon, who called for raising the debt ceiling. I vividly recall the late conservative pundit, Robert Novak, aka The Prince of Darkness, heaping scorn on bond traders on the McLaughlin Group. Now that is a true conservative sentiment. Nice to see you so early in the day, Timothy. Ah, Charles Peters. There was a scourge of entitlements (Peters is still alive; I utilize the verb "was" to refer to when he was the editor-in-chief of The Washington Monthly).
- liberalref
September 23, 2011 at 12:00pm
The issue of inflation and unemloyment is but one example of a phenomenon that has spread across the nation, especially on the right. It seems quaint now, but at one time many supported unemployment compenstion because the unemployed were considered to be contributing an essential public service, namely, low inflation. Of course, this was at a time when Americans thought they could do just about anything. Eliminate unemployment and poverty, cure cancer, and on and on. With the rise of the religious right has also come the rise of fatalism and the belief that we control nothing, that God controls everything. We've traded can do for providence. Not surprising since many if not most Christians hear the same sermon every Sunday: you are not in control, we are not in control, only God is in control. It's often framed on the right in political terms, that the government can't do this or that. But "government" is simply a collective means for solving problems. Now we can only hope that providence shines on America.
- rayward
September 23, 2011 at 12:11pm
Some TNR readers don't follow the markets. I suggest they do, in which case they would know what "calamity" befell the bondholders the past few weeks. To repeat, it's bondholders not traders that control public policy today. With so much of the nation's wealth now invested in bonds, should we expect anything different.
- rayward
September 23, 2011 at 12:15pm
Absolutely right. Important post. And I happen to think history has proven Volcker was unnecessarily cruel and caullous.
- IggyPop
September 23, 2011 at 6:02pm